FX focus shifts outside US in the week ahead 12May17


· US economic data cupboard is bare next week

· Oil rally may come to an end if $48.05-20/b caps the upside

· G7 finance minister sound bites could disrupt Monday’s Asia open

Oil prices have pushed back from the week’s lows, but gains may be limited. Photo: Shutterstock

By Michael O’Neill

The US dollar closed out the week with solid gains against the G10 currency bloc. Strong data, an increased risk of more than three US rate increases in 2017, a slew of strong economic reports, and the Trump/Comey sideshow were among the factors fuelling the move.

Oil rebounds

Oil prices have bounced back from last week’s low with WTI gaining 9.6% since touching $43.80/barrel on May 5.

Last week’s WTI selloff was precipitated by stubbornly high US crude inventories and sluggish gasoline demand while US shale oil production increased.

WTI rallied after the strong US employment report and “verbal intervention” as Saudi Arabia reassured markets that Russia will extend Opec production cuts beyond the end of June.

The rally was capped at $46.90 until the Energy Information Administration reported that US crude inventories declined by 5.25 million barrels, exceeding the forecast. WTI added to its gains and hit $48.15/b on May 11.

That could be it for now, however, as the Opec Monthly Oil Report, released May 11, raised the forecast for non-Opec supply by 370,000 barrels/day to 950,000 b/d, due to increased production in the US. The group’s forecast for world oil demand was left unchanged at 1,270,000 b/d.

Non-Opec production:

Source: Opec

WTI prices are at a crossroads. Prices are close to the May 11 top of $48.05/b, which is also the downtrend line from the April peak. A decisive break above $48.05/b will confirm a short-term bottom is in place and lead to a test of $52.00/b. A move below $46.50/b will extend losses to $44.00/b again.

Loonie falls flat

When WTI rallied on May 5, USDCAD behaved normally and dropped, falling from 1.3790 to 1.3645. It made another attempt to crack support at 1.3650 on May 10. That move ended when Moody’s announced six Canadian bank downgrades. USDCAD climbed to 1.3770 before consolidating within a 1.3680-1.3710 range.

The Moody’s downgrade of the Canadian banks followed last week’s news that alternative lender Home Capital needed a bailout. USDCAD bulls felt empowered.

However, Home Capital’s woes had nothing to do with the quality of its mortgage portfolio, but merely regulatory issues. Moody’s could be accused of “crying wolf” as the concerns raised in last week’s bank downgrade were very similar to the ones they raised five years ago.

The intraday and short term USDCAD technicals are bullish with a break of resistance at 1.3740 leading to 1.3850. A break of 1.3640 will meet added support at 1.3610 and 1.3570.

USDCAD weekly:

Source: Saxo Bank

The week ahead

This week the focus shifts to key European economic releases while a lack of top-tier US economic reports may lead to further choppy but rangebound trading for the FX majors.

Monday’s Asian start will be far quieter than the previous week, although sound bites from the G7 finance ministers’ weekend meeting, could have an impact.

New Zealand retail sales may warm the cockles of kiwi traders. The Reserve Bank of New Zealand is fresh off a dovish statement so the report should not have much impact. Later, Australia home loan data will compete with China retail sales, and industrial production for attention. There is not much of anything on tap for the rest of the day

Tuesday, AUDUSD traders will study the minutes from the Reserve Bank of Australia meeting of May 2. AUDUSD could get a bid if the minutes are as upbeat (as the policy statement appeared to be). UK PPI, and CPI data will be front and center in Europe especially after the May 11 reaction to the Bank of England policy statement.

Source: Saxo Bank

Eurozone GDP and trade will be studied to see if the data supports European Central Bank president Draghi’s dovish stance. US housing data shouldn’t be much of a factor for traders

Wednesday, kiwi traders will deal with the results of the GlobalDairyTrade auction and PPI while AUDUSD traders look at consumer confidence data. Europe will be busy with UK employment data and Eurozone CPI. The US data cupboard is bare.

Thursday, Japan leads with GDP and Australia follows with the employment report. The UK answers the bell with Retail Sales data and the US reports are all second-tier.

Friday will be quiet in Asia due to a lack of data and Europe won’t be much livelier, for the same reason. In Canada, CPI and retail sales data are on tap.

The week that was

A couple of central bank meetings were expected to keep things interesting this week… they did.

Monday started with Asia reacting to round two of the French elections; Emmanuel Macron soundly trounced Marine Le Pen and we were off to the races.

EURUSD gapped higher at the open in Asia and then began a slow decline that lasted all week. Japan returned from a five-day break and bought USDJPY to 113.07. It then started to slide until mid-morning in Europe, where it found a bottom at 112.40. The US dollar closed higher in New York against the G10 currencies.

Tuesday, USDJPY extended Monday’s gains thanks to the improved risk tone. It rose from 113.14 to 114.30 by the New York afternoon but ended the day at 113.85 on another North Korea nuclear threat.

Weaker-than-expected Australia retail sales capped a small AUDUSD rise while NZDUSD inched lower ahead of Thursday’s RBNZ meeting. Sterling was whippy inside a 1.2914-58 range while keeping an upward bias. Federal Reserve hawks squawking about rate hikes helped to underpin the greenback. A big decline in US crude inventories at the end of the day took WTI prices off the lows.

Wednesday, USDJPY dropped further on the North Korea nuclear story but found a floor at 113.63. It bounced between that level and 114.35 until New York closed.

President Trump’s firing of FBI director Comey distracted FX traders through the US session making for a quiet trading day.

Fortunately, the EIA crude stocks data surprised with a larger than expected drawdown. Oil prices soared sending USDCAD from an overnight peak of 1.3738 to 1.3648 at the close.

Thursday the bottom fell out of kiwi at the Asia open. The RBNZ left rates unchanged and seemed to be more dovish than expected. NZDUSD gapped down from 0.6938 to 0.6817. AUDUSD traded lower in sympathy with the kiwi move.

USDCAD soared and then bounced within a wide 1.3675-1.3770 range. Strong US data and Moody’s were behind the move.

In Europe, sterling tanked after the Bank of England policy statement. The BoE said its forecast were based on a “smooth Brexit” negotiation. Traders didn’t buy that assumption.

A round of better-than-expected US data made for a very choppy US session. EURUSD tried and failed to extend losses below 1.0840. USDJPY sank on profit-taking and on some concern about the Trump/Comey circus. The day ended with traders waiting for key US Retail Sales and Inflation data on Friday.

"There’s more where that came from." Photo: Shutterstock

— Edited by Michael McKenna

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Author: Loonieviews

In the past 30+ years, I have been an FX interbank market making trader, a high performing FX and Derivatives Sales person, creator of simple and complex risk mitigation strategies and a manager of high performance FX teams. The Trade of the Day is a culmination of that experience. Retail FX traders have access to a well-crafted and carefully researched FX trade strategy designed to generate FX profits while mitigating losses.

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